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Schroder Oriental Income benefits from sterling weakness and good stock selection

Schroder Oriental Income Fund has announced its interim results for the six months ended 29 February 2016. During the period, the company provided NAV and share price total returns of 8.6% and 4.5% both outperforming the company’s MSCI AC Pacific ex Japan Index, which rose by 4.3% (all in sterling terms). The company says that stock selection primarily drove the NAV outperformance.

The manager says that the positive returns recorded by Asian markets over the first half of the company’s financial year are entirely thanks to the weakness of sterling; underlying markets were broadly weak in local currency terms, particularly during the broader sell-off of global equities seen in January. Reportedly, five regional markets registering negative local currency returns, but provided a positive return in sterling. The Indonesian rupiah, New Zealand dollar and the Malaysian ringgit have been among the strongest performers.

In terms of performance, the manager says that the main factors behind the outperformance of the company’s NAV has been stock selection in Hong Kong, Singapore and Korea, with lesser contributions from Australia, Indonesia and Taiwan. The only market of significant shortfall in relative performance was Thailand where the manager says that regulatory uncertainty and chaotic spectrum auctions impacted the company’s telecom holdings. However, within the telecom sector more broadly, strong performance in other markets, notably Hong Kong, more than offset this, while selection in financials, industrials, and consumer staples also added value. Country allocation was a small positive factor due to the underweighting of China, partly offset by the underweights in Korea and nil weight in Malaysia.

In terms of portfolio positioning, the main country exposures remain Australia, Hong Kong, Singapore and Taiwan. Within this group, the managers added to Australia and Hong Kong with marginal reductions in Taiwan and Singapore exposure. The managers say that the direct exposure to China and Korea remains constrained by the paucity of solid dividend paying stock opportunities. Thailand remains the company’s principal overweighting in emerging ASEAN. In terms of sector exposures, information technology was reduced (mainly in Taiwan) whilst telecoms and financials were increased.

In terms of outlook, the manager believes that consensus thinking appears to incorporate a list of positives, although whether they are internally consistent is open to question. One strand is the view that the Federal Reserve has become notably less hawkish on interest rates, due to the previous tightening impact of the stronger dollar and the (probably related) fact that there are fragilities surrounding the global economic picture, most notably in a number of emerging markets. However, there are also signs of a stabilisation in Chinese growth (amid more credit expansion, a stabilisation in foreign exchange reserves and a pick up in residential real estate activity), the easier credit conditions engendered by the weaker dollar, and the recovery in manufacturing sentiment indicators seen across most developed markets and many emerging markets. The managers believe that these views are inconsistent and that it is wishful thinking to hope for both a more dovish Federal Reserve and accelerating global growth. Reflecting this, the manager expects that equity markets will be volatile and effectively trade sideways for some time yet.

Schroder Oriental Income benefits from sterling weakness and good stock selection : SOI

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